Friday, April 15, 2011

To Tax, or Not To Tax, That Is Not The Question

This is for everyone, including President Obama, stomping around like my two-year-old daughter whining about how we need to raise taxes on the “rich.” I can hear her now…”DA-DA! Higher Taxes! DA-DA, DA-DA! Higher Taxes, DA-DAAAAAAAAAAA HIGHER TAXXXXXXESSSSSSS!!!”

Can actual "millionaires and billionaires" like Jamie Dimon and Warren Buffet afford to pay higher taxes? Sure. Will these tax increases help reduce the deficit? Yes, but in the same way that chugging eleven Bud Light’s will make you less drunk than polishing off the entire twelve-pack.

The 2010 deficit (i.e. the amount by which spending was greater than revenue) was $1.3 trillion dollars in cash terms. Said another way, in the time it took you to read that last sentence, the government spent $349,000, but only earned, from all sources, $211,000. The total income tax revenue (not including social security and Medicaid payroll taxes) was $902 billion. Therefore, even if we doubled everyone’s income taxes, we’d still be left with a $400 billion annual deficit.

In 2008 (the last year from which I could find this information, and a year in which the US Government took in $130 billion more in income taxes than in 2010) the top 5% of taxpayers paid $605 billion in taxes (59% of all tax revenues). The top 5% represented everyone with adjusted gross income of at least $159,619, and their effective tax rate was 21%. So even if President Obama were to lower his definition of “rich” to those making at least $159,000 (a huge U-turn that would be a major problem in 2012), he’d need to more than triple all of their taxes, to an effective rate of 67%, in order to balance the budget.

This analysis assumes constant income levels at the higher tax rates, which, of course, would never happen. Incomes would plunge if rates increased significantly, making the problem much, much worse. Even a plan as dramatic as a five percentage point increase in the effective tax rate for the top 5% (i.e. from 21% to 26%) would only generate $146 billion in additional revenue, which is enough to run the government for all of 14 days.

This proves just how much populist rhetoric was in play during the President’s recent budget speech in which he repeatedly mentioned “millionaires and billionaires.” To paraphrase the President speech – “we’ve got a major budget problem, but 98% of you don’t need to worry about it because we’ll just hit up the richest 2% for more revenue. Oh, and by the way, we’ll have our policy wonks look into our suffocating entitlements and defense budget to see if we can magically save money without any substantive reforms.”

Yet another example of our politicians prioritizing re-election and saying what the people want to hear at the expense of serious leadership. The government has a spending problem, not a revenue problem. Any budget proposal that does not aggressively address the costs of Medicare, Medicaid, Social Security and Defense (together 63% of the budget, and growing fast) is not serious.

We need courageous politicians to action serious and realistic budgets aimed at getting the deficit under control. However, we also need voters to accept the uncomfortable consequences of a serious budget, knowing that if we continue to kick the can down the road, we face a certain and spectacular collapse.

Paul Ryan and the Republicans showed a modest amount of courage in their proposal - the President kicked the can…again.